As natural disasters become more frequent, insurers and policyholders are increasingly worried about potential implications for insurance coverage. In a 2023 CFO survey, 67% of CFOs cited natural disasters as a risk to their business in 2023. This puts risk from natural disasters on-par with economic volatility, geopolitical disruption, and data breaches among CFOs’ top concerns. Thirty-four percent of manufacturing CFOs even said they are looking to shift operations to a different country in 2023 because of the heightening rate and severity of these catastrophes.

Meanwhile, recent years have been marked by a “hard market” for business insurance, with rising deductibles and premiums and shrinking coverage. A tough insurance market only increases the need for businesses to be able to “tell the story” of the business impacts of a disaster event. The specifics of that impact will depend on various factors — the extent of the damage, the industry of the affected business, and the type of natural disaster — but in all cases businesses should understand the claims process and how to navigate it.

This piece will focus on best practices and responsible approaches following an event which causes physical damage to a premises.

Immediate Next Steps for Businesses Following a Loss

Immediately after an event occurs, businesses should take the following steps:

  • Activate the team: As a preparedness measure, all businesses should identify key individuals who will play a role in disaster recovery. This includes the CFO, treasurer, or head of accounting or finance, as well as the heads of facilities, legal teams, and risk management. In the wake of an event, businesses should call upon this team to coordinate with any outside experts, partners, or vendors who will help with disaster mitigation. These external partners may be contractors, accountants, outside legal help, or public relations professionals. The team should establish a regular meeting cadence for progress updates and synchronization.
  • Engage and enable disaster recovery professionals. Following an event, disaster recovery professionals will be on-site, documenting all aspects of the loss based on property and equipment inventory. They will engage in forensic accounting, using financial records to supplement their analysis of lost or potentially lost inventory, and will attempt to game out any downstream effects of a business halting full operations while it recovers. This process will be crucial to telling the story of the impact on the business.
  • Keep documentation organized: Working with the disaster recovery team, confirm that evidence of any loss is collected, well-organized, and carefully maintained. Specific dates and times can be critical to properly telling the story of a loss.
  • Remember what’s good for the business, not just for coverage: Prioritize forward momentum in the recovery process. Make recovery-related decisions as soon as possible.
  • Cooperate with insurers: Respond as promptly as possible to reasonable requests for documents and other information related to the ordinary course of business. This can help accelerate the claims and recovery process.

Documentation Best Practices

Documentation is crucial to telling the story of a loss and navigating the claims process. Businesses should collect any relevant documents as soon as possible after a disaster to ensure they are prepared and the insurer’s review is complete and accurate. Key considerations for documentation include:

  • Document recovery costs: These include all applicable documentation — such as estimates, contracts, POs, invoices, and receipts — for out-of-pocket expenses incurred because of an event. Be sure all contractors and vendors provide detailed invoicing, with descriptions of products and services rendered and supporting documents. For internal labor, closely track employee rates and hours, and provide detailed activity narratives.
  • Business interruption documentation: Retain all forecasts, budgets, backlog forecasts, production planning documentation, and schedules that were created before or as of the date of the loss. These will be essential for demonstrating the normal order of business and operations leading up to the event. While operations are suspended or interrupted, compile records to support a daily loss calculation, such as daily sales and month-to-date data. Also keep track of any increased costs resulting from the disaster, which could come in the form of extra overtime, costs related to mitigation through third-parties or competitors, or overnight or excess freight used to catch up after any interruptions have been resolved or to ship from alternate locations.

Determining Business Impact and Coverage

Assessments of business impact are the most complex component of a damage assessment. Understanding how disaster recovery professionals will conduct these assessments can help leaders create documentation and contribute more effectively to the claims process. Some key factors evaluated during an impact assessment are:

  • Industry: Depending on the industry of the affected business, a business impact assessment may require an understanding of materials, supply chains, specialized equipment, and lead times required for replacements. The industry can also affect the overall difficulty of an assessment. Real estate investment trusts (REITs) or commercial real estate businesses may make for a simpler assessment since loss of rents is easily measurable and would be the main impact in terms of lost revenue. Impact assessment for a petrochemical business, for example, would be more complicated, because revenues depend upon commodity prices which can fluctuate daily.
  • Nature of Loss: The type of loss will affect both the extent of any business impact and available insurance coverage. A total loss of a facility carries different implications than damage alone. When there is partial damage, insurance deductibles will need to be compared to business interruption losses. Because deductibles are often 5% of total insured values, more minor damage may not end up being covered. The nature of the loss also impacts the type of insurance coverage available. Property policies may cover organizations for years, allowing time to rebuild facilities, whereas cyber policies are often capped at six months. Understanding the coverage term and limitations will be crucial for effectively navigating insurance claims.
  • Time of business interruption: Cases where business is interrupted for a shorter period can pose a greater challenge when assessing business impact. Most companies don’t measure sales and costs on a daily basis, meaning it could be harder to show losses which occur over a shorter duration. In some cases, given rising deductibles, a business may need to be out of service for 20 days or more before its insurance kicks in.

Natural disasters and other catastrophic events are a present and growing risk for businesses. In a challenging insurance environment, businesses should proactively prepare to quantify any losses which may occur and tell the story of any damage. Understanding how professionals approach disaster recovery can help organizations navigate the claims process, mitigate their losses, and resume normal operations as quickly and efficiently as possible.


Brad Murlick

Brad Murlick is managing director of forensic insurance and recovery services for BDO.

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